30 Apr 2013

Calm Down About The Deficit

By Ben Eltham

No matter how many graphs Julia Gillard and Wayne Swan throw at us, the narrative that Labor can't manage the public purse retains its tenacious hold, writes Ben Eltham

Just how bad is Australia's deficit problem? According to most of the mainstream media, pretty bad. The weekend papers were full of deficit doom and gloom, with most of the blame sheeted home to a government supposedly living beyond its means.

The Australian Financial Review, for instance, ran a double-page spread which juxtaposed the terrifying upward snake of a budget graph in nominal dollars against a shrieking headline that read “It's the spending, stupid”. The more demotic forms of media have led today with stories about a rise in the Medicare levy. Even the ABC, which really should know better, has jumped on the higher tax bandwagon.

What's causing this outbreak of budget hysteria? An admission by the Prime Minister this week of a further deterioration in tax revenues. Julia Gillard yesterday told an audience of wonks and reporters at think-tank Per Capita that revenue this financial year would be $12 billion less than estimated.

“The 'bottom line for the Budget bottom line' is this,” the Prime Minister said. “The amount of tax revenue the Government has collected so far this financial year is already $7.5 billion less than was forecast last October.”

“Treasury now estimates that this reduction will increase to around $12 billion by the end of the financial year.”

That shortfall takes the cumulative revenue write-down for 2012-13 to $32 billion since the 2010-11 mid-year economic and fiscal outlook. As the graph below shows, the federal Treasury has consistently over-estimated the recovery in tax revenues flowing into Commonwealth coffers since the expected recovery from the GFC began in 2010. 

What this shows is that the problem is mainly on the revenue side, not the spending side. Compared with the final years of the Howard government, Commonwealth spending remains at roughly similar levels as a percentage of the economy. As we've consistently argued here at New Matilda, the reason the Commonwealth is in “structural deficit” is that we simply don't collect enough tax to pay for the government services citizens demand.

The problem is, in the dying days of this administration, no-one wants to give Labor any credit for spending restraint. If the budget is in deficit, it must because the government is spending too much. No matter how many graphs Julia Gillard and Wayne Swan throw at us, the narrative that Labor can't manage the economy retains its tenacious hold.

As is usual with Labor, matters have not been helped by a series of own goals. The most lamentable example was the ill-fated promise to return the budget to surplus. By investing so much political capital into the notion that it would return the budget to surplus this year, the Government effectively conceded the Opposition's point that the budget balance is the key measure of economic management. It could have been a triumph of bold policymaking. The tax revenues didn't eventuate, and now Labor has egg on its face.

In fact, as events in Europe are conclusively demonstrating, the crude fact of the government's budget position is but one element in a complex set of economic considerations, and not even the most important one. The most important factor in driving government tax revenues is the overall health of the economy — improvements in productivity, growth and the like. If these indicators are weak, taxes take a hit, and the budget moves into the red. In times of growth, tax revenue rises, and a prudent government can deliver surpluses and pay down public debt.

That, broadly, is what Swan and Gillard are doing. It's just that tax revenues are not returning to health as quickly as hoped. The reasons are much canvassed, and include big carry-forwards available to mining companies in return for infrastructure investment, the poor design of the mining tax, weak corporate profits in the non-mining economy, and too many income tax cuts in the Howard and Rudd years.

There's no doubt that this government could responsibly cut spending, by the way. The place to do it is most obviously in tax expenditures, which are the special tax breaks given to certain sectors of the economy. These exemptions are distorting and regressive, because by carving a special tax break for a particular activity, they place an unfair burden on everyone else who doesn't enjoy such luck.

Collectively, they're worth more than $100 billion. Superannuation tax breaks are worth $30 billion, and rising quickly. Capital gains tax exemptions on the family home are also worth around $30 billion. Negative gearing for landlords is another measure that costs billions and appears to actually harm the economy, by driving rents up. The mining industry currently enjoys around $3 billion in fossil fuel subsidies in the form of the diesel fuel rebate.

Could some of these tax expenditures be addressed? Of course they could. The Henry Review, commissioned by the Rudd government, recommended a raft of reforms in 2010 that would have shored up Australia's tax base. Mining taxes, negative gearing and capital gains were all in the mix.

As we know, very few of Ken Henry's ideas were ever implemented. The one big idea that Labor did try to run with, the mining tax, led to a savage attack campaign from the industry it sought to tax. Similarly, when Swan recently announced very modest tweaks to superannuation tax breaks, a storm of media and industry criticism erupted. Tax reform is politically difficult, to say the least. Just ask Rudd or John Howard.

Our airwaves have recently been filled with pundits and media economists like Chris Richardson decrying the spendthrift ways of our political leaders. But take a couple of steps back from the current debate for a minute, and a certain clarity starts to emerge.

The real structural deficit is not so much between taxing and spending, but rather between the electoral incentives in a modern democracy. Politicians of all stripes seeking to balance the books these days are caught in a difficult bind. Handing down deficits is never a good look. But the alternatives can be even worse.

The vicious reaction to Labor's modest and economically prudent tax increases in the form of the mining tax and the carbon price shows just how hard it is to introduce new taxes in the current environment. Cutting services is also unpopular, as the Newman government is Queensland is finding.

But what really matters for the health in the budget in the long run is the strength of economic growth. A deficit this year  of $15 billion is around 1 per cent of our gross domestic product of approximately $1.5 trillion. If the economy grows more strongly over time, that is by far the best way to increase the long-term budget balance.

And the best way to increase economic growth is to lift productivity, particularly the productivity of our labour force, by skilling up our workforce and bringing hitherto excluded members of the population into gainful employment.

It just so happens that Labor has two policies currently aiming to do exactly these things. The Gonski schools reforms aim to improve the performance of the schools system particularly the bottom half of it. The National Disability Insurance Scheme aims to lift productivity by bringing new workers into the economy. They are both expensive, but the government is finding at least some spending cuts and savings to help pay for them. In these two measures at least, as partial and as compromised as they are, the government really is thinking about the long-term.  

Fairfax's Tim Colebatch wrote a compelling article today in which he lamented the economic illiteracy of much of the deficit coverage. “In the end, it's not the deficit that matters,” he wrote. "It's the economy.” The truth is that, under Labor, the economy has performed very well.

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davidstephens
Posted Tuesday, April 30, 2013 - 13:33

Just heard Penny Wong say in relation to the NDIS: "a structural spend demands a structural save". Actually, two other options are (1) a tax increase or a levy (which lets hope they are not scared off) (2) borrowing (usually something you consider, or we used to, for infrastructure but infrastructure tends to be defined broadly these days, not just bricks and mortar, girders and bitumen).

ozzydazz
Posted Tuesday, April 30, 2013 - 14:04

It's amazing just how anyone can write an article that even considers Labor management of any area of Government let alone their economic management and give it some positive spin.

It's just so funny and rediculous that it belongs in a comedy script.

It's even funnier than Clive Palmer. Hang on there's a thought you have may have further jobs prospects Ben!!

douglas jones
Posted Tuesday, April 30, 2013 - 14:30

Ozzydazz I disagree. The media and Coalition have made a meal of negativity denigrating any and every thging. To day one might expect a story about the ISDAfix, dont know what that is, well join the world of Australian newspapers for this is a big brother way of fixing interest rates on everything. The media as with their Julia fixation is fixated on big business but not on its control and dishonesty. See Common Dreams Rolling Stones areticle by Matt Taibbi. Libor again?

The media and opposition assumes everyone is illiterate in economic terms, unfortunately correctly so this crap about the deficit. Defict is bad if spent on ephemeral things including when caused by tax breaks but when spent on long term items which improve economic situation, for example being better educated or better able to live a more productive life it is good for it will in time be gone.

Business wants short term gain preferably without pain of considering long term consequences, like forgetting the environment and long term effects on climate.

It is quite amusing to see business jumping at adjusting climate by some technical fix like lime inm the oceans or sulpher in the air. Yet the modellking of these is considerably less robust than are climater models. Oh Ive just realised there may be profit and should it go wrong well the masas of society will bear the cost if lives are threateneds or pay the cost if they survive.

The media want  stories of  the short term, preferably without taking time and effort to establish its accuracy and its place in societies knowledge and the opposition just want power aftrer all as Pyne claims they was robbed of their positiuon in governement a few years ago and their blathering so busy laying bricks sweeping floors or dicing meat  Mr Abbott cannot wait to wear a crown.

kwoldring
Posted Tuesday, April 30, 2013 - 14:57

OK, Ben's message is clear. It is a revenue problem. Few would disagree. I am just wondering if the Gillard Government is going to extract more income tax from, e.g.

a. the banks - as suggested by the Greens

b. mining companies, simply more progressive company tax, not revisiting the super profit tax

c. excessive executive salary packages - not effectively tackled following the 2009 inquiry.

Presumably, these are sources that can be tapped. They could add significantly to revenue, and would please most voters. But nobody seems to be making such suggestions as far as I can figure out.

 

 

ozzydazz
Posted Tuesday, April 30, 2013 - 15:11

douglas jones spoken like a true believer, really ??

So everything boils down to the media and the coalition for all Labors decisions on policy and policy making?

Do you normally dream in the middle of the day?

 

calyptorhynchus
Posted Tuesday, April 30, 2013 - 15:43

If they want to balance the budget there four easy things they can do

1. Stop subsiding private education

2. Stop subsiding private health care

3. Stop paying middle-class welfare

4. Stop subsiding fossil fuel industries

if they did this they would have a surplus worth writing home about.

Spero
Posted Tuesday, April 30, 2013 - 16:46

"The narrative that Labor can't manage the public purse retains its tenacious hold."

The reason why:

Read: 

http://www.thepoliticalsword.com/post/2013/04/28/Grasping-at-prime-ministership-the-Abbott-way.aspx

Unfortunately there are too many "OZZYDAZZES" about who are unduly influenced by Murdoch, his Mates and Minions.  They closely follow the script. Their guide - the Principles and Strategies of the LNP!

Rupert has made up his mind who to vote for. Say hello to Tony!

This user is a New Matilda supporter. DrGideonPolya
Posted Tuesday, April 30, 2013 - 16:47

A sensible article by Ben Eltham. However in addtion to current Government costs versus tax receipts,  the huge costs of Gonski and NDIS proposals - that may  entrench the huge deficit  situation with huge social  detriment - need careful examination.

A. . Before ONE CENTS is spent on Gonski "reforms", there are many urgent educational procedural reforms that should be introduced that will either not actually cost  anything or cost very little but dramatically address Educational Apartheid (see:https://sites.google.com/site/educationalapartheid/ ) e.g.

1. Zero tolerance for truancy,

2. Zero tolerance for class disruption.

3. Compulsory sport.

4. Compulsory music.

5. Compulsory intelectual games e.g. chess and bridge.

6. Urgent, compulsory,/voluntary mix of  on-the-job training for  English as a Second Language teaching, especially for teachers involved  in teaching Aboirignies and recent migrant populations.

7. A language other than English from early primary school onwards (exploiting the huge  resource of Aborignal  and migrant families)

8. Greatly increased involvement in family in teaching and learning (e.g. see #7).

9. A comprehensive,family-apporved,  multiple mentor system for all children involving tradespeople, professional, sports people,  all kinds of focussed people etc .

10. Compulsory learn to swim.

11. Extra dedicated classes fro 3Rs catch-up.

12. Properly approved and appropriate  teaching aide employment fro people on benefits.

13. Rigorously secure and confidential mechanisms for child reportage of abuse.

14. Cessation of any state funding for any  private schools commititng child intellectual abuse by foisting egregious falsehood on children e.g.  sexism, homophobia, misogyny, sexual guilt, racism, jingoism, creationism, intelligent design, other religious clap-trap (virgin birth etc) and the right to inavede, devastate and ethnicaly cleanse other countries.

15. Use by state school children of taxpayer-funded private school resources.

16. Partnership betrween state and private schools.

17. Accredited remote learning (see: https://sites.google.com/site/educationalapartheid/ ).

18. University-secondary school links and mentoring.

19. Explicit text-based curricula .

20. 3Rs testing while making sure thanthis dies niot pervert education.

21. A book for every child (Mark Latham).

22. Modest incentives and financial  "bribes" for improvement.

etc etc etc.

(B). One hopes that the NDIS will  not be squandered and will be used selectively on a needs basis to assist the extremely seriously disabled, and especially those in impoverished families (I helped care for 2 seriously disabled children for over 20 years and currently helkp provide care for several elderly people simply out of love and moral obligation, and all  without the need for NDIS support).

ozzydazz
Posted Tuesday, April 30, 2013 - 17:14

Fortunately for me spero history and fact are on my side and no yours.

...and fortunately you represent a minority.

Tell me one election promise/policy from 07 and or the last that Labor has implemented with a successful outcome?

And where in the hell do you compare me to the Murdock and his so-called mates? It's funny when you have no substance just go for the man, are you an adviser to the Labor Party? If so keep doing what your doing it's really working.

People like you remind me of those who keep saying "talk to the hand"

Jordan
Posted Tuesday, April 30, 2013 - 17:34

@ozzydaz says

"It's amazing just how anyone can write an article that even considers Labor management of any area of Government let alone their economic management and give it some positive spin"

Daz, I love how you took the time and care to provide us with the reasoning behind this conclusion. Thoughtfully argued and logically impervious. If only the likes of Ben Eltham could learn from you and try using some persuasive arguments rather than just blurting out partisan slogans, eh?

Spero
Posted Tuesday, April 30, 2013 - 17:36

Hi OZZY!

You have ignored the link I presume? Not interested I guess? Too close to home? You would have noticed the similarity of your arguments. Not quite up to your leader's standard yet. In order to "OZZY - DAZZLE" the ignorant great unwashed you must try harder!

Cheers, have a good evening.

Rowan
Posted Tuesday, April 30, 2013 - 17:47

It's amazing just how anyone can write an article that even considers Labor management of any area of Government let alone their economic management and give it some positive spin.

It's just so funny and rediculous that it belongs in a comedy script.

It's even funnier than Clive Palmer. Hang on there's a thought you have may have further jobs prospects Ben!!

Right on mate!

 

Jordan
Posted Tuesday, April 30, 2013 - 19:04

Oh look. Isn't that cute - ozzydaz has a friend/pseudonym.

Elbert
Posted Tuesday, April 30, 2013 - 20:03

calyptorhynchus I agree, but you left out taxing the tens of billions of dollars in profits made by religious corporations, and the government subsidising of their un-audited 'charities', as well as their refusal to pay rates or other reasonable local taxes, putting a greater burden on all honest taxpayers.. 

Dr Gideon Polya, I agree with your suggestions.

arjay
Posted Wednesday, May 1, 2013 - 01:06

Can we have rational discussion here please; there is no need for some posters/commenters here to engage in under-graduate style petulance. No political organisation occupying the role of government has ever met the need of all citizens, I would gladly welcome paying more tax to help the less capable or disadvantaged; but no party insists I do. I have never suffered or crashed financially under any Australian government. News reportage is not about reality anymore, it's a business first and foremost and emotional stimulus must be built-in to the equation to sell seats.

ozzydazz
Posted Wednesday, May 1, 2013 - 09:26

Spero:  You still failed to answer the question -

"Tell me one election promise/policy from 07 and or the last, that Labor has implemented with a successful outcome?"

Too hard?? I would have thought it a no-brainer. Lets try another - Is a levy a tax or a payment of money over a fixed period?

 

 

ozzydazz
Posted Wednesday, May 1, 2013 - 11:48

@Jordon said

"Daz, I love how you took the time and care to provide us with the reasoning behind this conclusion. Thoughtfully argued and logically impervious. If only the likes of Ben Eltham could learn from you and try using some persuasive arguments rather than just blurting out partisan slogans, eh?"

I just can not get my head around you actually think this is a serious article!!

Silly me......

Jordan
Posted Wednesday, May 1, 2013 - 22:15

@ozzydazz, just curious - where did you read that Jordan thought this was a serious article?

I scoured the comments but can't find any such assertion.

It seems to me that what Jordan was pointing out was the idea that sometimes people have different ideas about certain issues, and that when people disagree they can put their views forward and explain their rationale for holding those views. This may then lead to an exchange of ideas, thoughts, feelings and the like. Conversation. Discussion. Debate.

I think Ben Eltham has done precisely this. He's given us his views and explained why he holds them.

People who read these articles and participate in the comments may have different views. Some may not know as much about a particular subject area as others and might find value in posts in the comments that challenge the views expressed in the article.

For example someone that does not have particularly strong views regarding the subject of this article may welcome a critique of Mr Eltham's ideas. If those ideas are so patently absurd, then one might reasonably assume that it would be easy to demonstrate as much (what is obvious to you may not be to someone else).

When all you provide is a simple assertion that Ben is wrong and you are right, without addressing a single point made in the article, it leaves the impression that either a) you are only interested in petty slagging or b) you are unable to provide any compelling counter-arguments.

Spero
Posted Thursday, May 2, 2013 - 08:04

@Jordan.

Thanks. You can lead a horse to water but you can't make it drink!

 

Elbert
Posted Thursday, May 2, 2013 - 08:17

Excellent point, Jordan, especially the final paragraph. Pay attention, ozzydaz.

Stripling
Posted Friday, May 3, 2013 - 21:42

Ditto Spero,

                      The spin  against the minority government pretty much began with the leadership tussle.

A lot of people were cheesed that they didn't vote for Gillard.

The Nanny State attitude hasn't helped. NOT that the LNP would be any different.

Now its ALL ABOUT THE DEFICIT.

Hopefully people will see through the smokescreen and the election won't just be another pillar and gatepost with nothing for the people.

 

steveintianjin
Posted Sunday, May 5, 2013 - 14:56

My God. We have a possible deficit that equals 1% of our GDP while in Europe some governments labour under debt exceeding 100% of their GDP. If any non-Labour scoundrel dares to compare the Australian situation to Europe's he deserves summary dismissal and good riddance because he is pedalling a lie. And yet, come September 15, the whispers of "cut, cut, cut" will suddenly become gleefully, perhaps maniacally,fetishistacally(?) strident as the razor boys of the liberal party go to work in pursuit of the holy grail of balanced budgets and small government. 

To my amazement we also have a $100million cash cow named TESsy mooing in our backyard and yet everyone says we can't balance the budget, pay for Gonski, NDIS, NBN and other productivity boosting measures. A snip here, a chop there and, voila, we have liftoff to the land of opportunity, equity and equality once more. I can understand if it's a matter of getting legislation through parliament (probably) but it still comes down to having the guts to make the unpopular decisions and acting in the national interest. Labour under Gillard has shown remarkable resolve  in pushing ahead with it's major reforms. It's just a pity they didn't have the guts to stand up to the industry bullies when implementing rational reforms like the  mining tax and the carbon t....sorry, price. Meanwhile the liberals (sorry they don't deserve a capital L) bleat (yes, like sheep) "noooooooo, rePEAL it!. Weeeeee caaaan't affffoooooooord  it."

Oh, and just a short note to my collegial commentors. Let's play the ball, not the man. Reading news these days is not just reading the stories, but also the comments, resulting in the democratisation of the newsfeed. I'd really prefer not to wade through flames and trite retorts to find the facts and considered opinions. Still, maybe I'm dreaming, like I also dream about the disappearance of the tabloid press and it's sorry excuse for journalism. And I also proofread my post. Standards, please.

Cheers.

steveintianjin
Posted Sunday, May 5, 2013 - 15:52

Spero, isn't it " Rupert has made up our minds who to vote for"?. Noam Chomsky wrote a piece on the media called "Manufacturing Consent." Maybe Mr Murchoch  keeps a copy under his pillow. 

Dr Polya, that's quite a manifesto you've got there, and it deserves comment. While I would agree that money isn't the whole answer, it is, like 100 lawyers at the bottom of Sydney Harbour, a good start that will make many of your suggestions possible. Money is required to employ additional teacher aides, provide extra classes, and role out a credible NBN that will facilitiate vast improvements in online learning.

In online learning, the opportunity for improving equity are many and varied, including developing the capcity to deliver education to people with disabilities and  who live in remote areas that preclude them from participatiing fully. I think this goes to the heart of the "educational apartheid" issue. Interestingly I read an article on the NDIS, in which Bill Shorten spoke of  the "apartheid" idea in relation to people with disabilities, and this nearly 20 years after the introduction of the 1992 legislation designed to eliminate discrimination against people with disabilities. 

You mention of the concepts of zero tolerance and compusory activities, which are easy in theory, but increasingly problematic in practice. I am a teacher, albeit a new one, but  as a teacher I can speak from the inside of school with a clientele of students from  low socio-economic  and migrant backgrounds. I believe that behaviour management methods, such as detentions and suspensions, are largely ineffective and counter-productive (as far as educating students is concerned). My feeling is that regular detentions and suspensions become a a kind of badge of honour for some students, and, in their effect, follows the law of diminishing returns. 

Compulsory sport is essential, as it assists brain development and provides a physical outlet that is particularly important for some students. The academic demands of years 11 and 12, however, demand that sport become "extra-curricular" in my opinion, although no less essential. However,  I think compulsory music in high school is a waste of time, as many students seem to think it is just a "free" period in which to "act out." 

I think continuous learning of a language from primary school is an important idea. I've worked in China, and students learn English from about Year 3 onwards. I'd vote for Chinese or another Asian language, but the intellectual benfits of learning a second language are clear enough to warrant the inclusion of any second language as a compulsory subject. The internationalisation of local economies is another good reason for it, too.

Finally, in point # 8 you suggest increasing the involvement of families in the education of their children as a resource. Unfortunately, while this maybe possible in some ways, the socio-economic circumstances of many parents precludes their involvement, either due to work commitments, language difficulties in the case of migrant or indigenous parents, and also their own level of education. My own thougths on this are that parents and children should " go back to school together." In this process, with the active support of the school and education system, parents would receive a second education in which they revise and update their own skills and knowledge in parellel with their children.

Of course, this would cost money...

casusbubble
Posted Wednesday, December 11, 2013 - 23:06

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